Theory and practice of corporate governance Unit III

The Concept of Corporation

• LINDLEY'S DEFINITION: According
to LINDLEY.L.J a company is defined as
• “an association of many persons who
contribute money (or) money's worth to a
common stock, and employ it in some
common trade (or) business (i.e., for a
common purpose), and who share the profit
and loss arising therefrom.
 LINDLEY'S DEFINITION continuation---
• The common stock so contributed is denoted in
money and is the capital of the company,
• The persons who contributed it or to whom it
belongs, are the members,
• The proportion of capital to which each
member is entitled is his share,
• Shares are always transferable, although the
right to transfer them is often more or less
restricted”.
 Common definition of corporate structure

The companies Act of 2013:

1.A voluntary association of persons
2.An artificial person has no body or sole
Definition :- Registered company means a
company incorporated under the companies
act of 2013.
 Characteristics of a the corporation
1.Incorporated Association

2. Artificial legal existence/Separate legal entity (Salmon v/s

Salmon & co. Ltd)

3.Limited Liability:- (a) limited by shares & (b) limited by guarantee

4.Perpetual Existence/succession
5.Common seal
6. Extensive Membership
7.Transferbility of shares
8.Separation of management from ownership
9.Capacity to sue.
 Kinds of Corporates as per Companies
Act 2013
1. CLASSIFICATION ON THE BASIS OF INCORPORATION
(a) Statutory companies:- these are the companies which are created by a
special act of the legislature , e.g., The Reserve Bank of India, The State
Bank of India, The Life Insurance Corporation, The Unit Trust of India.

(b) These are mostly concerned with public utilities, e.g.,railways,

tramways, gas and electricity companies and enterprises of national
importance.
(c) The provisions of the companies act 1956 apply to them, if they are not
inconsistent with the provisions of the special acts under which they are
formed.
2. Registered companies:- These are the companies which are formed and
registered under the companies act of 2013.
 2. Classification on the basis of liability

1. Companies with limited liabilities. These

may be:
(a) Companies limited by shares, or
(b) Companies limited by guarantee
2. Companies with unlimited liability
 3. Classification on the basis of number of
members
1. Private company:- according to Sec 3(iii)
private company means a company which
has a minimum paid up capital of
Rs.1,00,000 or such higher paid-up capital as
may be prescribed.
Limits the number of members to 100.
 Classification on the basis of number of
members
2. Public Company:- means a company which has a
minimum paid up capital of Rs. 5.00,000 or such high paid
up capital, as may be prescribed.
4. Classification based on the Basis of control
1. Holding Companies:- a company is known as the holding
company of another company if it has control over that
other company.
2. Subsidiary Company:- a company is known as the
subsidiary of another company when control is exercised
by the latter over the former called the subsidiary.
• Government company : A government
company means any company in which not
less than 51% of the paid-up share capital is
held by:
• (a) the Central Government
• (b) any State government or
• © partly by Central Government and partly
by any of the State Governments.
• Foreign company : It means any company
incorporated outside India, which has an
established place of business in India.
The Concept of Governance
 The Concept of Governance
• Governance means the process of decision
-making and the process by which decisions
are implemented.

• Governance can be used in several contexts

such as corporate governance, international
governance, national governance and local
governance.
 The Concept of Governance
• Governance focuses on the formal and
informal players involved in decision- making
and implementation of decisions made.
Theoretical Basis of Corporate Governance

• There are four broad theories to explain and

elucidate corporate governance:
1. Agency theory
2. Stewardship theory
3. Stakeholder theory
4. Sociological theory
 Behavioural Differences
Agency Theory
Managers act as agents
Governance approach is materialistic
Behavioural pattern is :
Individualistic
Opportunistic &
Self serving
Managers are motivated by their own
objectives
Interests of the managers and principals
differ.
The role of management is to monitor
and control
Owner’s attitude is to avoid risks.
Principal – manager relationship is based
on control.
Stewardship Theory
Managers act as stewards
Governance approach is sociological and
psychological
Behavioural pattern is :
Collectivistic
Pro-organizational
Trustworthy
Managers are motivated by the
principal’s objectives.
Interests of the managers and principals
converge
The role of management is to facilitate
and empower.
Owner’s attitude is to take risk.
Principal – manager relationship is based
on trust.
Common features in the German & Japanese Models

1. Banks and financial institutions have substantial

stakes in the equity capital of the company.

2. Institutional investors in both the countries view

themselves as long term investors. They play a
fairly active role in corporate management.
Common features in the German & Japanese Models
3. The disclosure norms are not very stringent, checks
on insider trading are not very comprehensive and
effective, and the emphasis on liquidity is not high. All
these factors lead to the efficiency of the capital
market.
4. There is hardly any system of corporate control in
these countries. Mergers and take-overs are rare
occurrences.